Written by Nathan Thomas on April 28, 2004
Written by Nathan Thomas on April 28, 2004
Nationwide, housing values grew 8.4 percent last year, and 7.6 percent the year before that, according to Freddie Mac. In the fourth quarter alone, the last quarter for which data has been released, the annualized property value appreciation rate was a staggering 17.8 percent.
What's feeding this remarkable growth? It's a question that's been asked and theorized upon by investors, money managers, chairpersons of the Federal Reserve and homeowners. Clearly, low interest rates, government action to encourage homeownership, a plentiful supply of homes, and other economic and demographic factors are drivers of growth.
But there are important artificial movers of property appreciation that appraisers and economy watchers need to be aware of. Mortgage fraud is one. As fraud becomes more and more prevalent, values are skyrocketing in certain areas beyond the sustainable.
A recent report in the Atlanta Journal-Constitution said that in the seven years from 1995 to 2002, prices for residences south and east of downtown Atlanta more than doubled, from about $79,000 to $183,000 (it was unclear whether the figures were averages or medians). South and west of downtown, prices skyrocketed from about $46,000 to nearly $117,000.
Mortgage fraud, a recurring problem in Fulton County with hundreds of prosecutions in the past five years by the U.S. Attorney there, is said to contribute to the meteoric rise, according to the report.
"Mortgage fraud tends to take place in a small geographic area that has a wide variety of prices," Anne Fulmer, former DeKalb County prosecutor, told the AJC. "Areas undergoing renaissance are ripe for this because you could have a $20,000 crack house within a quarter-mile of a $500,000 renovation. They use the renovation to establish the bogus value of two or three homes, and the neighborhood seems to take off.
"On paper, it all seems to fit for out-of-state lenders who are looking at automated underwriting and automated valuing," Fulmer said.
This is one of the hidden costs of the inexplicable push to use automated valuation models (AVMs) more and more frequently. Some AVM vendors have taken the step of having a real estate professional - appraiser, broker, realty agent, it doesn't usually matter - to drive by the subject and verify its existence and overall condition.
But as illustrated in Atlanta, what about the comps? Are appraisers "assisting" AVMs looking into whatever the algorithm decided were the best comparables to the subject as well? And as layer upon layer of inflated values build up in fraud-prone areas, would it even help? If a $150,000 sale price on a run-down comp was supported by an inflated value, the sale of which was supported by an inflated value, the sale of which was supported by an inflated value... how can a professional appraiser, let alone a computer model, possibly get it right?
Next week, we'll look at two less nefarious but probably more prevalent factors in artificially inflating values: creative mortgage financing and seller-assisted down payments. In the meantime, if you have any war stories about fraudulent values, send them to the editor by clicking here.